'House of Cards' By William D. Cohan
Reviewed By Chuck Leddy
William D. Cohan opens his economic narrative with Bear Stearns's dramatic March 2008 collapse, which concluded with a Federal Reserve-backed, last-minute merger with investment titan J.P. Morgan.
As Cohan's meticulous analysis makes clear, the investment bank's plunge was caused by a combination of factors, including a lack of internal controls, disengaged leadership, inadequate regulatory oversight by the US government, a plunging housing market, and Bear Stearns's overexposure to mortgage-backed securities.
Cohan, himself a former Wall Street investment banker, describes the rise and fall of Bear Stearns, detailing how its swashbuckling corporate culture and brutal internal politics undermined the bank at a time when the financial system suffered a liquidity crisis. Bear Stearns's customers and creditors, Cohan shows, reacted to the bank's overexposure to subprime mortgages in a predictable way: Customers began pulling their money out, and creditors stopped lending.
This liquidity crisis doomed the bank and kicked off the near-collapse of our entire financial system. Cohan explains why federal officials intervened last March: "Their concern was that the financial system had become increasingly fragile . . . and Bear Stearns's failure might cause tsunami-like damage if it was not contained." Cohan quotes a Morgan insider regarding its absorption of Bear Stearns: "This is insane. Why would you ever want to take on this piece of [expletive], other than out of some sort of patriotic sense of obligation?"
After describing the dramatic March collapse of Bear Stearns, Cohan goes back to discuss the beginnings of the bank. He discusses its "opportunistic culture" suspicious of theory. "If you made money for the firm," notes Cohan, you were given latitude to run things the way you wanted. "This haphazard strategy is key to understanding what happened in March 2008."
For example, when Bear Stearns got into the booming hedge fund markets by setting up its own line, it made money based largely on betting on the skyrocketing housing market in the form of mortgage-backed securities. Yet as abuses in the subprime housing sector began emerging, the housing market dipped and so did the value of Bear Stearns's securities. By the end, Bear Stearns would have billions of dollars of debt and a portfolio of toxic assets that nobody wanted to buy or accept as collateral.